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Is Sirius Minerals PLC the best mining investment opportunity in the world?

Sirius Minerals. Fair use.

The long term outlook for Sirius Minerals (LSE: SXX) is extremely positive, but at the same time extremely uncertain. On the one hand it has the opportunity to record stunning share price growth, since it trades at a fraction of its net present value and is on track to enjoy high demand for its polyhalite fertiliser. However, on the other hand Sirius Minerals faces uncertainty and challenges which could lead to a high degree of volatility and disappointing share price performance.

In terms of recent developments, Sirius Minerals has been able to deliver the financing required in order to push ahead with stage 1 of its two-stage plan. While this is excellent news for the long term potential of the company, the equity raising has caused its share price to drop back to 20p from a high just a few months ago of 40p. This provides evidence of how volatile Sirius Minerals’ share price could be in future. Investors deciding to buy it should be comfortable with the potential for significant paper losses over the short to medium term.

Lack of diversity

Clearly, Sirius Minerals has a sound strategy through which to build the world’s largest potash mine in York. However, there is no guarantee that things will progress as expected. After all, first production is not expected until 2022 and during this time there is a wide range of variables which could go against the company. Some are known unknowns, such as delays in constructing the project, while others are unknown unknowns. In other words, it is difficult to ascertain the level of risk involved with the project, since it is a long time period prior to first production.

So it could be prudent to invest in a company that is already highly profitable. Furthermore, Sirius Minerals lacks diversity, which means that its risk profile is likely to be higher than that of other mining companies such as Glencore (LSE: GLEN). In Glencore’s case, its turnaround strategy is progressing well, with debt reduction cutting the company’s risk profile and asset disposals also helping to create a more streamlined and profitable company.

Risk of volatility

Looking ahead, Glencore is expected to record a rise in earnings of 83% next year. This puts it on a price-to-earnings growth (PEG) ratio of 0.2. Therefore, it has a highly appealing risk/reward ratio, which is superior to that of Sirius Minerals at the present time.

Clearly, demand for higher crop yields is likely to rise as world population increases. In this sense, Sirius Minerals has an opportunity to capitalise on what are likely to be favourable operating conditions. However, there is a very long way to go until production begins and between now and then, there are likely to be challenges and risks which could cause Sirius Minerals’ share price to become increasingly volatile.

Therefore, while Sirius Minerals has long term profit potential, it does not appear to be the best mining investment opportunity at the present time. Glencore offers lower risk and high potential rewards.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.